Russia would pay steep price for Ukraine invasion

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Vladimir Putin wants to destabilise Ukraine, but he may balk at the economic price Russia would pay for a full-blown invasion. The seizure of government buildings in several eastern Ukrainian cities has rekindled fears of military intervention in the mostly Russian-speaking parts of the country. A major consideration before sending in troops would be the price paid by Russia’s economy. Putin can expect to be severely punished by both markets and Western governments.

If Russia enters Ukraine by force, it will be hit by economic sanctions from the United States and the European Union. Western powers were criticised for the weakness of their reaction to the annexation of Crimea – when they targeted only a limited list of individuals and companies. But the penalty for invading Ukraine – a country that has recently concluded deals with the EU and the International Monetary Fund – would be much harsher. Whatever their dependence on Russian gas, EU members, primarily Germany, could make things very difficult for Russia. They could well accept the need to pay their own price for sanctions, which always hurt both ways. Trade, investment flows with Russia, could suffer significantly.

The mere prospect of a tough economic riposte is likely to trigger a market reaction that would be a sanction by itself. Russian stocks are already down 3 percent this week, taking to almost 7 percent their decline since early March and the start of the Crimean troubles. The rouble looks stable, but that may be due to both central bank currency intervention and the market’s expectation of another interest rate hike. The economy will stagnate at best this year. Capital flight topped $70 billion in the first quarter, against an already staggering $63 billion for the whole of 2013. The top five companies on the Moscow stock exchange – four energy groups plus financial giant Sberbank – have lost a combined $54 billion of market capitalisation since January. And the government had to cancel its bond auction this week because of “unfavourable market conditions.”

The Russians’ implicit pact with Putin has long been that they enjoyed prosperity in exchange for limited freedom. His hope now appears to be that his popularity can rest on expansionism abroad instead of economic expansion at home. But that will bring more misery upon Russia, which may give him reason to pause.

This article missed the fact that Ukraine was, is, and will be, badly unstable; in fact, it was Russia that provided the stability that kept the place on life support and kept it whole. It is a social and economic basket case. Neo-Fascists and Anti-Semites are a big part of the new government in Ukraine. It is really scary. Their country is hugely in debt, and instead of Russia paying those debts the US and the IMF and the EU are going to foot the bill. Ukraine is the Greece of two years ago.

Russia stands to benefit economically, and the ones who should be worrying are the Europeans. Germany needs Russian natural gas to fuel its industry. Germany depends on Russia for 30% of its natural gas needs. That is a lot.

Putin is enjoying huge domestic support. Obama will never see those kinds of approval ratings. And Putin is cleaning up the Russian military and making it leaner and stronger. Today in the Russian press one can learn that Putin just fired 14 useless Generals. Despite what one reads in the Western press it sure looks like a win-win for Putin and Russia, and that is obviously why they did it. Obama looks helpless. Maybe he should not have said that Putin was like a kid skulking and sitting in the back of a classroom. The ineptitude of those remarks challenges anything G.W. Bush ever let drop from his mouth.

Putin is not skulking in the back of the class, and he never was to begin with. And President Obama calling Russia a mere “Regional Power” is another titanic misunderstanding. Mere local powers do not have the power to wipe the US off the map. That is why the wise course would be to show Mr. Putin some respect like G.W. Bush did. Sometimes one just has to conclude that the current administration is completely lost in the sauce, and that is no good for anyone.